Sunday, April 7, 2013

Some commenters on the last post seem to be getting caught up in issues that seem to me to miss the point. Bob Murphy writes: "You guys are something else. Does it matter that that Mellon quote--which Krugman uses to characterize the 1930s record in the eyes of his readers--was produced in Hoover's Memoirs, so that Hoover could explain that he did the opposite of what Mellon suggested?"

The problem is, he didn't really do the opposite from Krugman's perspective, although he might have from Bob's perspective. "Opposite" all depends on where the origin of your particular Cartesian plane lies.

Here's one way of putting it that IMO makes much more sense in reading Krugman's article: Barack Obama is Herbert Hoover and Paul Ryan/Ron Paul is Andrew Mellon. Of course Obama/Hoover didn't exactly listen to Ryan/Paul/Mellon. But the point is the whole atmosphere is still one of austerity. Yes we have relatively less austerity than Ryan/Paul/Mellon would want us to have or that the EU has. But that doesn't mean that there isn't a problem - that there isn't still in Krugman's words "an urge to purge". That is where the center of gravity is - with austerity. Of course it's not the austerity that Bob Murphy wants. He doesn't want a hiring freeze and a 20% pay cut for federal workers. He wants them fired. But "not satisfying what Bob Murphy is interested in" is not the definition of austerity.

As I said yesterday, Hoover was an austerity president. So was the early Roosevelt. They both did some nice things on the margin. In the monetary realm the early Roosevelt did some very good things. But it was still a period of relative austerity. Would a hypothetical President Mellon have been even more austere? Well of course he would have. So?

6 comments:

Even though Hoover repudiated the "hard" Mellon form of liquidationism, Hoover certainly followed a moderate form of austerity that was bad enough:

(1) In fiscal year 1930 (meaning: July 1, 1929 – June 30, 1930), Hoover ran a federal budget surplus. That is the antithesis of what a Keynesian would have done.

(2) Hoover cut spending in fiscal year 1933, and the net effect of federal fiscal policy in fiscal 1933 was contractionary against 1932. This was made much worse by the Revenue Act of 1932 which increased taxes and applied to fiscal year 1932 and subsequent years. No Keynesianism here.

(3) all we are left with is fiscal 1931 and 1932. In both years fiscal policy was mildly expansionary, but a drop in the ocean compared with the drop in GDP. State and local austerity destroyed a lot of the minimal expansionary effect.

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Also, the crucial thing with early Roosevelt: he stabilised the banking system. That made a big difference.

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Finally, have a look at Austria in the 1930s, where Mises had some role in policy advice: total disaster:

Are we sure that it was fiscal, not monetary, timidity that was entirely to blame for the Depression?

Re: Mises--you are right, any monetary contraction that Mises may have recommended to the Austrian govt in the wake of Creditanstalt/subsequent Austrian bank run would have been dead wrong.

But "Hayek’s monetary policy norm for a central bank, clearly stated in his writings, was to stabilize nominal income (MV or PQ in the equation of exchange MV=PQ). A collapse of the money stock M or its velocity V calls for the central bank counteraction to increase M and thereby restore MV."

Hoover wants to distinguish himself from Mellon but how different from Mellon was he actually? Liquidate labor, 30% unemployment, liquidate stocks, down 90%, liquidate farmers, many bankruptcies, an imploding banking system, maintaining the gold standard, raising taxes, attempting to balance the budget. He may not have literally followed Mellon's advice, but he did precious little otherwise and ended up with Mellon's result. He was a conventional man in times requiring an extraordinary one. His opponents believe he would have done better following Mellon's advice which is ridiculous on its face. Did we need 50% unemployment, stocks down 99%, every last bank to have failed?

but: "Typically one would call policy austere when it involves a decrease in spending (and one might continue to do that when it does happen to grow but only because of population growth, demographically increased # of entitlements etc).

It's already more of a stretch of the term that policy is austere when even though spending is increased it is increased less than what was projected and/or hoped for and/or promised earlier. (that seems to be the way the term is being used in the media and politics these days)

But you seem to go even further here by saying that Hoover's policy was austere because he didn't spend as much as was needed to get the US out of the Depression. Then the comparison is no longer with an earlier state or with an earlier projected state, but with a subjectively prescriptive state (how much he *ought* to spend.

I'm not saying that this is an indefensible use of the term 'austere' per se, but there is a risk that by using that term to mean this other people who hear the term will interpret it in the more standard ways that I mentioned above, so that they would get the wrong idea when listening to somebody describing the current (or the Hoover) situation as one of 'austerity'. They may for example be less inclined to agree if by that you didn't mean that actual cuts had been made or that spending was less than projected, but only that spending is less than youd like it to be."

I agree that "relative to what" is an important point. Relative to doing nothing, or relative to previous peacetime presidents, Hoover was the opposite of austere (ignoring tax hikes & Smoot-Hawley). Even relative to FDR prior to war mobilization, he seems quite similar. "Relative to what's needed" can be an understandable standard (Scott Sumner criticizing central banks for failing their statutory responsibility), but it's not a natural framing for most readers who make an act/omission distinction.